The Use of Electronic Reverse Auctions in Public Procurement in South Africa

5 THE USE OF ERAS IN SA

In terms of section 217 of the Constitution⁸⁷, public procurement by organs of state in all spheres of government must take place in accordance with a system that is fair, equitable, transparent, competitive, and cost effective. To give effect to these constitutional requirements, framework legislation was enacted regulating public procurement.

The first Act is the Public Finance Management Act,⁸⁸ (hereafter the PFMA) which prescribes the general system for public procurement that must be followed by national and provincial governments, the public entities listed in Schedules 2 and 3 of the Act, constitutional institutions, Parliament, and provincial legislatures. The second Act is the Local Government: Municipal Finance Management Act⁸⁹, (hereafter the MFMA) which regulates public procurement on local government level.⁹⁰

There are numerous other acts⁹¹ that either directly or indirectly deal with or have an influence on public procurement. They were not promulgated to exclusively regulate public procurement but rather to regulate other aspects of government administration.

In principle, the public procurement regime of South Africa does not exclude the use of ERAs. The Electronic Communications and Transaction Act⁹² indeed promotes e-government services and electronic communications and transactions with public and private bodies, institutions, and citizens. The regulations promulgated in terms of the MFMA in fact allow the use of auctions as a method of procurement⁹³. Although auctions are mentioned as a method of procurement in the PFMA, the MFMA and the regulations promulgated in terms thereof, they do not specifically regulate the use of ERAs. ERAs will in every instance it is used have to comply with the constitutional requirements of fairness, equitableness, transparency, competitiveness, and cost-effectiveness.

When considering whether ERAs should be used for a specific public procurement, the specific circumstances in South Africa need be taken into account. Not all suppliers or potential tenderers, especially the smaller ones, have access to reliable e-communication, especially in the more rural areas. Many of them also do not necessarily have the expertise or self-confidence to use e-communication and some do not trust it. In the case of small local government procurement entities, the possibility of collusion is real as the value of the contracts may limit participation to local suppliers who all know each other. ERAs need well-trained specialists in the specific field to properly draft specifications and to determine the value to be allocated thereto. It is doubtful whether all the smaller procurement entities do have such expertise. The use of consultants to manage ERAs on behalf of the procuring entity has inherent risks. In particular, if little capacity is available in the procuring entity it will make it vulnerable for abuse by consultants. All public procurement entities have their own procurement policies, which may lead to a duplication of resources and different specifications, standards and criteria when using ERAs. In low value procurement, the costs of consultants may not justify the outsourcing of this function. A substantial part of suppliers who do not have the necessary technology or expertise or self-confidence to partake in ERAs could be excluded from participating when using ERAs. They could quite often be people from the previously disadvantaged section of the population. Special measures will have to be taken to ensure that the Preferential Policy Framework Act⁹⁴ is implemented when using ERAs. This can be done by a system of pre-qualification and awarding the necessary preferential points⁹⁵ beforehand to tenderers who wish to partake in a particular ERA. Such points can then be factored in when utilising the ERA.

The proper use of ERAs by larger procurement entities with the necessary expertise and infrastructure that do high value procurement may on the other hand lead to substantial savings. Such savings may relate to both the costs of the subject matter of the procurement and the costs and time relating to the procurement process itself.

The use of ERAs in public procurement in South Africa can be successful if National Treasury issues proper and detailed regulations that regulate which procuring entities may use ERAs for the acquisition of prescribed products, determine under which circumstances it may be used, prescribe the way in which it should be conducted, and provide the necessary software and training to the procuring entities and potential tenderers. The UNCITRAL Model Law is a good example of a regulatory framework within which ERAs can be used which should ensure that the general objectives of public procurement and the prescripts of section 217 of the Constitution are achieved.

6 CONCLUSION

The importance of electronic communication in public procurement should not be underestimated. Electronic commerce is steadily growing and its use will increase in future. The use of electronic auctions in the private sector is well established and the use thereof will probably increase with the increase in use of information technology. Although ERAs have their own inherent limitations, they can be successfully used for the procurement of standardised, simple, and generally available goods.⁹⁶

In principle, there exists no reason why electronic auctions should not be used in public procurement in South Africa⁹⁷. It in fact has many advantages that will enhance the constitutional principles of fairness, equitability, transparency, competitiveness, and cost-effectiveness. The proper utilisation thereof can lead to substantial savings in costs and time for all parties to the auction. One of its attractions is that it could limit fraud and corruption, if properly used, as the auction takes place in a real-time setting with little or no human interference whilst the information is immediately available to all participating tenderers.

There are however potential disadvantages which should be limited and managed through proper regulation. In particular, the ease of use of ERAs may lead to the over utilisation thereof for procurement not really suited for ERAs. Procurement entities might not have the necessary capacity to ensure the proper use thereof and might be exposed to consultants who do not necessarily have the procuring entities’ best interests at heart.

It will be to South Africa’s advantage to adapt to international trends in e-procurement. It should however not be done indiscriminately but be incrementally implemented, within a proper regulatory framework, taking into account the specific challenges in the South African public procurement environment. For purposes hereof, the Model Law can be used as a template for National Treasury to develop regulations for the proper implementation of ERAs in public procurement in South Africa.

* BA LLB (UP) Bcomm (UNISA) LLM (UP) LLD (UNISA)

1 ^See http://www.uncitral.org/uncitral/en/uncitral_texts/procurement_infrastructure/2011Model.html (accessed 9-02-2012).

2 See http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm10_e.htm#govt (accessed 15-04-2011).

3 Hereafter referred to as the “Revised GPA”.

4 ^{Art 1(6) of 2004/17/EC and art 1(7) of 2004/18/EC.}

5 ^{In the USA it has been in use since the mid nineties. Tully “The B2B tool that really is changing the world” 2000} Fortune 132; Eyo “The EC Rules on Electronic Auctions: Scope and Adequacy of the Rule” paper delivered at the 3rd PhD Public Procurement Conference, University of Nottingham (21-06-2007 - 22-06-2007). Text available at http://www.nottingham.ac.uk/pprg/conferencesandevents/pastevents/phd-conference.aspx (accessed 23-02-2011); See also Arrowsmith “Regulating of Electronic Reverse Auctions in Public Procurement Law” in Arrowsmith (ed) Reform of the UNCITR4L Model Law on Public Procurement: Regulation for the 21^st Century (2009) 361-364.

6 ^{For a general discussion of the different types of auctions that can be utilised, as well as a discussion of auction theory and its applicability to public procurement, see Soudry “Promoting Economy: Electronic Reverse Auctions Under The EC Directives On Public Procurement” 2004} Journal of Public Procurement 340.

7 UNCITRAL has six working groups to perform the substantive preparatory work on topics within the Commission’s programme of work. Each of the working groups is composed of all member States of the Commission. Working Group 1 deals with Public Procurement. See http://www.uncitral.org/uncitral/en/about/methods.html (accessed 15-04-2011).

8 At its 19th session, Working Group 1 agreed on the text for the new Model Law on Public Procurement. It is contained in the document A/CN.9/729/Add.1-8. This revised Model Law was accepted by the Commission at its 44th session (27-06-2011 - 8-07-2011). Available at http://www.uncitral.org/uncitral/en/uncitral_texts/procurement_infrastructure/2011Model.html (accessed 20-02-2012).

9 ^GPA/W/313.

10 ^{Neither s 217 of the Constitution 1996, the Public Finance Management Act 1 of 1999, Local Government: Municipal Finance Management Act 56 of 2003 nor the Preferential Procurement Policy Framework Act 5 of 2000 refers to ERAs. The use of ERAs is, on the other hand, not specifically excluded by the mentioned legislation.}

11 ^{25 of 2002.}

12 “Transaction”, is defined in s 1 of the Act to include transactions of a commercial nature.

13 S 217(1) of the Constitution provides as follows: “When an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive, and cost effective.”

14 ^{Art I(f).}

15 ^{Art 1(6) of 2004/17/EC and article 1(7) of 2004/18/EC.}

16 ^{Art 2(d).}

17 Bruner and O’Connor Bruner and O’Connor on Construction Law Database (2004) updated January 2010 vol 2 Chapter 7 para 7:36.50 307 define ERAs as follows: “Online reverse auction is a real-time dynamic process between a buyer and a group of prequalified, invited sellers who compete online to provide goods or services pursuant to clearly defined scope, specifications, and terms and conditions. As with traditional procurement process, in which a buyer invites bidders to submit bids, an e-RA [online reverse auction] calls for a buyer to publish a request for quotation (RFQ) for specific goods or services, and several bidders are invited to respond. Under the traditional bidding process, upon receipt of the RFQ, each interested supplier submits its bid by hard copy, fax, or email. Under the e-RA process, the bidding, or ‘auction’, takes place live, in ‘real time’ via the Internet, at a predetermined date and time, with the invited bidders bidding against one another. With online bidding, bidders do not see what others are bidding during the auction but receive immediate feedback

18 See Yukins and Wallace Public Procurement Law Review (2005) 183 183-202.

19 ^{This is the approach in Brazil. See Arrowsmith} Reform 373.

20 This flexible model is used in the UK and the EU. Arrowsmith Reform 373.

21 Shalev and Asbjornsen “Electronic Reverse Auctions and the Public Sector: Factors of Success” 2010 Journal of Public Procurement 428 443-444 and 447.

22 This entails a clear description of specifications, information, and conditions including those relating to quality, quantity, geographical conditions, transportation, lead times, and similar aspects. Smeltzer and Carr “Electronic reverse auctions: Promises, risks and conditions for success.” 2003 Industrial Marketing Management 481 481-488.

23 See Yukins and Wallace Public Procurement Law Review (2005) 183 183-202.

24 Jones, Hackney and Irani E-Government: An E-Reverse Auction Case Study. Proceedings of European and Mediterranean Conference on Information Systems Polytechnic University of Valencia, Spain (24-06-2007).

25 Ibid.

26 ^Ibid.

27 Charlesworth, Jeffery and Urwin “Electronic Reverse Auctions: Changing the Balance of Power from Suppliers to Buyers?” 2005 ACIS 2005 Proceedings Paper 38 available at http://aisel.aisnet.org/acis2005/38.

28 Jones, Hackney and Irani, E-Government: An E-Reverse Auction Case Study. Proceedings of European and Mediterranean Conference on Information Systems, Polytechnic University of Valencia, Spain (insert day-06-2007).

29 Charlesworth, Jeffery and Urwin, “Electronic Reverse Auctions: Changing the Balance of Power from Suppliers to Buyers?” 2005 ACIS 2005 Proceedings Paper 38 available at http://aisel.aisnet.org/acis2005/38.

30 Jones, Hackney and Irani, E-Government: An E-Reverse Auction Case Study. Proceedings of European and Mediterranean Conference on Information Systems, Polytechnic University of Valencia, Spain (24-06-2007); Brandon-Jones “Improving E-procurement compliance: The role of user perceptions.” POMS 20th Annual Conference 2009 2; Arrowsmith The Law of Public and Utilities Procurement 2 ed (2005) 1180; Soudry 2004 Journal of Public Procurement 340 UNCITRAL Working Group 1 at their 14th session during 2008 as is contained in document A/CN.9/WG.I/WP.61 11; Arrowsmith Reform 364 -367.

31 Vlok “A Principles-Orientated Approach to Regulating Reverse Auctions” 2007 Public Contract Law Journal 127. He states applicable principles to be maximizing transparency, selecting an offerer who is expected to perform and to design a competition that can be won.

32 A/CN.9/WG.I/WP.61 11.

33 Arrowsmith Reform 364-367.See also A/CN.9/WG.I/WP.61 11.

34 ^{A/CN.9/WG.I/WP.61 11.}

35 Jones, Hackney and Irani refer to reduced work in process; increased automation of processes; reduced paperwork and improved accuracy; elimination of tasks, reduced inventory, consolidated invoices and reduced transmission errors.

36 ^{According to Brandon-Jones “Improving E-procurement compliance: The role of user perceptions.”} POMS 20th Annual Conference 2009 2 this includes the costs of supplier search and selection, processing the order requisition, authorisation, order generation, receipting, invoicing and payment.

37 ^{Eckhaus and Bates “The Battle against the Global Financial Crisis: The Case for the e-Reverse Auction” paper delivered at the 7th Ihna-Le-Havre International Conference (2009) para 6 available at} http://www.univlehavre.fr/recherche/cerene/IntemationalConference/pdf/papers/Eckhaus-Bates.pdf; Eyo “The EC Rules on Electronic Auctions: Scope and Adequacy of the Rule” paper delivered at the 3rd PhD Public Procurement Conference, University of Nottingham (21-06-2007 -22-06-2007. Text available at http://www.nottingham.ac.uk/pprg/conferencesandevents/pastevents/phd-conference.aspx (accessed 23-02-2010).

38 Working Group I (Procurement) 7th session, New York (4-04-2005 - 8-04-2005) A/CN.9/WG.I/WP.35 stated: “In some countries where ERAs have been introduced, concerns have been expressed that, at least for some types of procurement, ERAs seldom provide benefits comparable to currently-recognized selection procedures. For instance, it has been suggested that they: (a) do not guarantee the lowest responsible and responsive price and continued savings in subsequent ERAs; (b) have hidden costs that may negate any savings realized from the auction process itself; (c) may encourage imprudent bidding and thus create a higher risk of abnormally low bids; (d) do not adequately handle non-price factors, such as quality of performance and buyer-supplier relationships; (e) create conflict of interests in market players, such as software firms and ‘market makers’ or ‘e-market operators’; (f) are more vulnerable than traditional bidding processes to collusive behaviour by bidders, especially in projects characterized by a small number of bidders, or in repeated bidding in which the same group of bidders participate; and (g) have negative effects on the market, including an anti-competitive impact and a negative impact on technical innovations and innovative practices.”

39 Arrowsmith Reform 367-371; Jones, Hackney and Irani, state that the use of ERAs could lead to poor sourcing decisions, poor buyer and supplier relationships, higher costs, less cooperative suppliers and longer delivery times.

40 ^{Eckhaus and Bates “The Battle against the Global Financial Crisis: The Case for the e-Reverse Auction” paper delivered at the 7th Ihna-Le-Havre International Conference (2009) available at} http://www.univ-lehavre.fr/recherche/cerene/IntemationalConference/pdf/papers/Eckhaus-Bates.pdf. Para 6.2 states: “One of the most dominant ones is that the fear from buyers that suppliers who win contracts thanks to low bids would not be able to deliver on their promises due to lack of resources or capabilities. Another issue is the high switching costs, which include evaluating and training the supplier, and coordinating organizational information systems; these often deter buyers from contracting with alternative suppliers, cancelling out all e-RAs’ strengths. As this tool is based on the internet, security measures must be taken to ensure the process; information security leaks may expose suppliers to passwords and identity theft, and reduce the trust in the medium, which is crucial to process success.”

41 ^{Yukins “A Case Study in Comparative procurement Law: Assessing UNCITRAL’s lessons for US Procurement” 2006} Public Contract Law Journal 183 warns that an ERA can bind a procuring entity to one technical choice which might not be the optimal solution.

42 Ratterman “The Use of Net Based Reverse Auctions to Procure Construction” 2004 The Construction Lawyer 22. This is especially true in projects characterised by a small number of tenderers, or in repeated electronic auctions in which the same group of tenderers participate.

43 ^{In many instances, the procuring entity will not have the necessary information technology expertise to run an ERA and will have to outsource such function to the private sector.}

44 ^{Working Group 1 stated that: “these agencies may represent and have access to both procuring entities and bidders, raising potential organizational conflicts that may pose a serious threat to competition.” See A/CN.9/WG.I/WP.61 11 and 12.}

45 ^{Working Group 1 also stated that: “as a result, the procuring entity may face additional costs arising from the use of electronic reverse auctions (opportunity costs such as those arising should suppliers or contractors abandon the government market if required to bid through electronic reverse auctions) and higher prices than those they would have obtained if other procurement techniques were used.” See A/CN.9/WG.I/WP.61 12.}

46 ^{At its 26th session.}

47 In the Model Law on Procurement of Goods and Construction and Services 1994 Guide to Enactment 4 it is stated that “Furthermore, the Model Law may help to remedy disadvantages that stem from the fact that inadequate procurement legislation at the national level creates obstacles to international trade, a significant amount of which is linked to procurement. Disparities among and uncertainty about national legal regimes governing procurement may contribute to limiting the extent to which Governments can access the competitive price and quality benefits available through procurement on an international basis. At the same time, the ability and willingness of suppliers and contractors to sell to foreign Governments is hampered by the inadequate or divergent state of national procurement legislation in many countries”.

48